Opinion
Bankruptcy Case No. 399-33823-rld13.
October 5, 1999
MEMORANDUM OPINION
This matter is before me on Multnomah County's Objection to Confirmation of Angela L. Howe's ("Debtor") chapter 13 plan (the "Plan"). Specifically, Multnomah County objects to the Debtor's proposal under paragraph 2(b) of the Plan to pay her property tax arrears with interest at 9% rather than at the rate of 16% provided by ORS 311.500 for delinquent real property taxes.
Following the adjourned confirmation hearings held in this case on September 9, and September 23, 1999, I have reviewed my notes, the parties' submissions and relevant legal authorities. The findings that I set forth in this Memorandum Opinion are designated as the court's findings under Fed.R.Civ.P. 52(a), applicable in this contested matter under F.R.Bankr.P. 9014.
A. Multnomah County is not a sovereign state and does not have sovereign immunity in this case.
At the outset, Multnomah County objects to confirmation of the Plan with a 9% interest rate on its property tax arrears as an unconstitutional infringement of its sovereign immunity and the Eleventh Amendment to the United States Constitution. The short response to Multnomah County's argument is that Multnomah County is not the sovereign and is not entitled to sovereign immunity. As stated by Chief Justice Rehnquist in his opinion for a unanimous United States Supreme Court in Mt. Healthy City School District Board of Education v. Doyle, 429 U.S. 274, 280 (1977):
The bar of the Eleventh Amendment to suit in federal courts extends to States and state officials in appropriate circumstances (citations omitted), but does not extend to counties and similar municipal corporations. See Lincoln County v. Luning, 133 U.S. 529, 530, 10 S.Ct. 363, 33 L.Ed. 766 (1890); Moor v. County of Alameda, 411 U.S. 693, 717-721, 93 S.Ct. 1785, 1799-1801, 36 L.Ed.2d 596 (1973). (Emphasis added.)
Also see Alden v. Maine, 119 S.Ct. 2240, 2267 (1999) (The principle of sovereign immunity "bars suits against States but not lesser entities. The immunity does not extend to suits prosecuted against a municipal corporation or other governmental entity which is not an arm of the State.").
Nevertheless, using the above-cited language from the majority opinion in Alden v. Maine as a point of departure, Multnomah County contends that the general principle that sovereign immunity does not protect county governments should not apply in this case. Multnomah County argues that in collecting interest on unpaid real property taxes, the county acts as an "arm" of the state of Oregon, subject to the supervision of the Oregon Department of Revenue, a state agency. See, e.g., ORS 305.102 and 306.115. As further support for its position, Multnomah County cites Article IX, Section 1 of the Oregon Constitution, which provides:
The Legislative Assembly shall, and the people through initiative may, provide by law uniform rules of assessment and taxation. All taxes shall be levied and collected under general laws operating uniformly throughout the State.
Multnomah County argues that because the Oregon Constitution requires that all taxes be levied and collected uniformly throughout the state, when Multnomah County collects 16% interest on delinquent real property taxes, as specified by state law, it acts as an arm of the sovereign state and, accordingly, should benefit from its sovereign immunity.
The problem with Multnomah County's argument is that it renders the clear distinction made by the United States Supreme Court in its sovereign immunity decisions between the states and local public entities, including counties, fundamentally meaningless. In context, the Alden v. Maine reference to "an arm of the State" generally relates to state agencies and officers employed directly by the state.
County governments in Oregon, as elsewhere in the United States, administer state laws with uniform provisions. That is an inherent part of their reason for being. See Oregon Constitution, Article VI, Section 10 (County officers shall "exercise all the powers and perform all the duties, as distributed by the county charter or by its authority, now or hereafter, by the Constitution or laws of this state, granted to or imposed upon any county officer." (Emphasis added.)). If counties take on the mantle of sovereign immunity every time that they act in some sense as agents of the state, the general rule that sovereign immunity does not extend to counties and other units of local government would be emasculated by the exception.
Neither the Oregon Constitution nor any of the statutes cited by Multnomah County in this case contains any specific provision purporting to extend sovereign immunity to county government. In fact, Oregon law contemplates that in the event an Oregon personal property tax obligor files for protection under the federal bankruptcy laws, the concerned county will submit itself to the jurisdiction of the federal bankruptcy court by filing a proof of claim. ORS 311.480 provides:
If a tax has been levied against personal property, and thereafter and prior to the date the tax becomes due and payable, the person against whom the tax is charged files a petition in bankruptcy, or is adjudged a bankrupt upon an involuntary proceeding, the tax shall become immediately due. The tax collector of the county where the tax was levied shall prepare and present to the bankruptcy court proof of claim of the county for the tax. (Emphasis added.)
Unlike the situation concerned in Pennhurst State School Hospital v. Halderman, 465 U.S. 89, 104 S.Ct. 900, 79 L.Ed.2d 67 (1984), I can make a complete determination of the issues between Multnomah County and the Debtor in this case without any involvement of Oregon state agencies or officers. In these circumstances, I find that sovereign immunity does not apply to prevent me from ruling upon whether the interest rate on the Debtor's property tax arrears can be modified in the Plan.
B. The statutory interest rate on unpaid real property taxes is modifiable under Section 1322(b)(2) of the Bankruptcy Code because the lien for real property taxes and interest accruing thereon is a statutory lien and not a security interest created by agreement.
The Debtor proposes to modify the interest payable to Multnomah County on unpaid real property taxes under the Plan pursuant to the provisions of Section 1322(b)(2) of the Bankruptcy Code, 11 U.S.C. § 1322(b)(2). Section 1322(b)(2) provides that through a chapter 13 plan, a debtor may "modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor's principal residence. . . ." (Emphasis added.) The Debtor concedes as undisputed that the real property concerned in this case is the Debtor's residence. The issue then is whether Multnomah County's lien for unpaid real property taxes and interest thereon is a nonmodifiable "security interest" for purposes of Section 1322(b)(2).
Unless otherwise indicated, all statute section references are to the federal Bankruptcy Code, 11 U.S.C. § 101 et seq.
In Section 101(50), the term "security interest" is defined as a "lien created by an agreement." Section 101(53) defines the term "statutory lien" as a "lien arising solely by force of a statute on specified circumstances or conditions. . . ." Multnomah County's property tax lien is created under Oregon state law.
ORS 311.405(1) provides that "all ad valorem property taxes lawfully imposed or levied on real or personal property are liens on such real and personal property, respectively." No agreement with the taxpayer is required for the attachment or perfection of Multnomah County's lien. Since the lien for real property taxes and interest thereon arises solely by statute and not from an agreement with the taxpayer, it is not a "security interest." Accordingly, I find that Multnomah County's lien for interest on unpaid real property taxes on the Debtor's residence property is modifiable under the provisions of Section 1322(b)(2). See Rankin v. DeSarno, 89 F.3d 1123, 1127-28 (3d Cir. 1996), cert. denied, 117 S.Ct. 943, 113 L.Ed.2d 832 (1997); In re Mitchell, 39 B.R. 696, 700 (Bankr. D. Or. 1984).
C. Multnomah County is entitled to a market rate of interest on unpaid real property taxes.
Having determined that the Debtor can modify the interest rate payable to Multnomah County on unpaid real property taxes in the Plan, the questions become what standards to apply in determining the appropriate interest rate, and what interest rate is appropriate under the facts of this particular case. The governing section of the Bankruptcy Code is Section 1325(a)(5)(B)(ii), which provides with respect to each allowed secured claim in chapter 13 that "the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim. . . ." In the event that a debtor proposes to pay a secured claim under a plan by means of a stream of payments over the life of the plan, as in this case, the present value of the payment stream must equal the amount of the secured creditor's allowed claim.
Courts and commentators have not been uniform in their approaches to determining appropriate interest/discount rates for purposes of Section 1325(a)(5)(B)(ii). Contrast the approaches taken by the Third Circuit in Rankin v. DeSarno, 89 F.3d 1123 (3d Cir. 1996), and General Motors Acceptance Corp. v. Jones, 999 F.2d 63 (3d Cir. 1993), with the commentary in 8 Collier on Bankruptcy ¶ 1325.06[3][B] at 1325-34 to 1325-38 (15th ed. 1999).
The standards applicable in the Ninth Circuit are stated in In re Camino Real Landscape Maintenance Contractors, Inc., 818 F.2d 1503 (9th Cir. 1987). In Camino Real Landscape Maintenance, the Ninth Circuit reviewed bankruptcy court determinations, affirmed without opinion by the district court, of the appropriate interest rates for deferred payments of delinquent federal taxes. The Ninth Circuit specifically rejected the federal government's requested interest at the rate set by statute, 26 U.S.C. § 6621. Id. at 1505. Instead, the Ninth Circuit held that the appropriate interest rate was a market rate to be determined on a case by case basis, considering the quality of security and the risk of a further default.
Although the Camino Real Landscape Maintenance case involved the determination of appropriate interest rates in a chapter 11 rather than a chapter 13 context, the relevant sections of the Bankruptcy Code are written in similar terms.Compare § 1129(a)(9)(b)(ii) [chapter 11] with § 1225(a)(5)(B)(ii) [chapter 12] and with § 1325(a)(5)(B)(ii) [chapter 13]. As stated by the Ninth Circuit Bankruptcy Appellate Panel in In re Patterson, 86 B.R. 226, 227-28 (9th Cir. BAP 1988), each of said sections of the Bankruptcy Code "requires a determination of the present value of a creditor's claim as of the effective date of the plan. Therefore, an interpretation of one section applies equally to the interpretation of the other sections."
The legislative history of § 1129(a)(9)(C) indicates that the rate of interest on deferred taxes should be the rate of interest that the debtor would pay to borrow a similar amount on similar terms in the commercial loan market. The debtor's characteristics determine the interest rate. The creditor's characteristics are irrelevant. Hence the fact that a particular debt arises from taxes due to the government does not affect the appropriate interest rate. It continues to be determined by the commercial loan market. Id. at 1505-06.
Accordingly, I have reviewed the evidence presented by the parties in this case to determine what interest rate would be appropriate on Multnomah County's property tax claim based upon relevant market information.
The parties have stipulated to the following facts: The real property (the "Property") concerned in this case is the Debtor's primary residence, located at 4215 S.E. 29th Avenue in Portland, Oregon. The Property has an estimated fair market value of $120,000. Multnomah County's lien against the Property for prepetition unpaid real property taxes is $3,792.13. The Property also is subject to a mortgage in favor of Advanta Mortgage in the amount of $103,366, with prepetition arrears of approximately $13,000. The Debtor proposes to complete payments under the Plan by July 2004. According to the Debtor's schedules, the Debtor's gross income for 1997 was $12,018 and for 1998 was $11,445. At the time of the initial evidentiary hearing in this matter on September 9, 1999, Debtor's counsel reported that the Debtor was unemployed. At the time of the second evidentiary hearing on September 23, 1999, Debtor's counsel could not confirm that the Debtor had found employment.
With those basic facts in evidence, the parties presented expert witness affidavits and testimony to establish whether financing would be available to the Debtor in the marketplace and, if financing were available, upon what terms. Multnomah County submitted the affidavits of three mortgage brokers in support of its objection to the Plan: Brian F. Page, Tom Oughton, and Matthew Burk.
In In re Fowler, 903 F.2d 694 (9th Cir. 1990), the Ninth Circuit reviewed and approved a different approach to determining the "market" rate of interest, based upon the use of a formula:
Under this approach, the court starts with a base rate, either the prime rate or the rate on treasury obligations, and adds a factor based on the risk of default and the nature of the security (the "risk factor"). Id. at 697.
In this case, no evidence was presented by the parties to establish either an applicable base rate or the appropriate risk factor to apply in conjunction with such a base rate to arrive at a market rate of interest. In any event, as stated by the Ninth Circuit in Fowler, "evidence of market interest rates for similar loans is relevant in arriving at the appropriate risk factor." Id. at 698.
Mr. Page is a mortgage broker specializing in the prime residential real estate market as a branch manager of Northwest Mortgage Group, Inc. Based upon his review of the stipulated facts, Mr. Page expressed the opinion that the Debtor would not qualify for conventional home financing under any circumstances and would be unlikely to qualify for subprime financing.
Mr. Oughton is a mortgage banker and broker specializing in the subprime residential real estate market working for Western States Mortgage. Based upon his review of the stipulated facts, Mr. Oughton expressed the opinion that the Debtor would not qualify for either conventional or subprime financing while her chapter 13 case was pending. However in the unlikely event that the Debtor could obtain subprime financing, Mr. Oughton stated that the lender would charge interest at the rate of approximately 15% plus 10 points, for an effective interest rate over the five year term of the Plan of 17%.
Since the Debtor will not have to pay, and Multnomah County will not receive payment of costs for services with respect to a new loan transaction, such as title insurance premiums, escrow fees and underwriting and processing fees, under the Plan, I find that it would not be appropriate to factor such costs into the discount rate to be paid pursuant to the requirements of Section 1325(a)(5)(B)(ii). Points are different. Points constitute an upfront interest or profit charge to the borrower by the lender beyond the monthly accruing interest charges and are an inherent cost of borrowing properly considered in determining the appropriate discount factor for purposes of Section 1325(a)(5)(B)(ii). See In re Camino Real Landscape Maintenance Contractors, Inc., 818 F.2d at 1506 ("To be properly compensated, [the government] must receive the rate of interest based on the debtor's cost of borrowing. . . ." (Emphasis added.)).
Mr. Burk is a mortgage banker specializing in the subprime residential real estate market as a managing member of Fairway Commercial Mortgage LLC. In his affidavit, based upon his review of the stipulated facts, Mr. Burk stated that the Debtor would not qualify for either conventional or subprime financing while her chapter 13 case was pending. However, if the Debtor were able to obtain subprime financing, Mr. Burk stated that the lender would charge interest at the rate of approximately 15% plus 5-10 points, for an effective interest rate over the life of the Plan of 16-17%.
During the course of his further direct testimony and crossexamination, Mr. Burk was asked if financing would be available to the Debtor on a recourse or nonrecourse basis if the lender could take a first priority secured position (such as is provided for real property tax obligations by statute in Oregon,see ORS 311.405(7)) for a loan of approximately $4,000. Mr. Burk testified that in his opinion, such financing might be available. On a recourse basis, the interest charged would be 12-13% per annum, and on a nonrecourse basis, the interest charged would be 14-15% per annum, with 5-10 points charged in each case for the loan. In those circumstances, the discount rate for such a loan would range from a low of 13% (12% interest plus 5 points) to a high of 17% (15% interest plus 10 points) over the term of the Plan.
In opposition to the expert testimony submitted in behalf of Multnomah County, the Debtor submitted the affidavit and testimony of Mr. Steen Claussen. Mr. Claussen is the Vice President, Northwest Region for Budget National Finance Company. He stated in his affidavit that he dealt with both conventional and unconventional lending, but testified that he had a particular focus on lending to chapter 13 debtors. In fact, he testified that he had closed loans for 58 chapter 13 financings during 1999 to the date of the September 23rd hearing in this case.
In his affidavit, based upon his review of the stipulated facts, Mr. Claussen stated that a person could get a loan of $4,000 secured by the Property at an interest rate between 10.5 and 13.5%. He further stated that a loan secured in first position on the Property would bear interest at between 8.25 and 9.75%.
On cross-examination, Mr. Claussen testified that a $4,000 first lien position loan on the property would cost the borrower 7 to 10 points, and in light of the Debtor's income and employment status, such a loan would bear interest at 10.5 to 13.5%, with it likely bearing interest closer to 13.5% than 10.5%. In these circumstances, the discount rate for such a loan would range from a low of 11.9% (10.5% interest plus 7 points) to a high of 15.5% (13.5% interest plus 10 points).
In evaluating the foregoing evidence, I have considered that a first priority secured loan in the amount of $3,792.13 on the Property valued at $120,000 would be a very safe investment. However, the risks of nonpayment during the term of the Debtor's Plan, considering her history of low compensation and recent periods of unemployment, also are substantial.
In light of all these consideration, I find that the Debtor would be able to obtain a first position secured loan in the amount of $3,792.13 on the Property in the subprime market, and I find that the appropriate interest rate to apply to Multnomah County's claim for real property tax arrears under the Debtor's Plan is 15% per annum. That discount rate is lower than the 17% rate derived from the information included in Mr. Oughton's affidavit, but is within the discount ranges derived from the affidavits and testimony of Mr. Burk and Mr. Claussen, skewed to the high end of Mr. Claussen's range consistent with his testimony.
Conclusion
Based upon the foregoing findings of fact and conclusions of law, I find that Multnomah County is entitled to interest of 15% on its allowed claim for real property tax arrears in the Debtor's Plan. Any Confirmation Order entered in this case shall reflect an amendment to the Plan to strike the Debtor's proposed payment of 9% interest to Multnomah County on its allowed real property tax claim and substitute interest at the rate of 15% per annum.